How you can retire at age 45 with £1 million

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financial independence

Most people dream of being able to quit the rat race and retire early. At first, this idea may seem like an unrealistic expectation. But with the just a little planning, you can secure your financial future and take early retirement to enjoy as much as your life as possible outside the workplace.

Putting together a plan

The first stage in planning for an early retirement is to decide what sort of retirement you want. If you intend to travel a lot or enjoy as many experiences as possible, you'll need much more money than the average retiree. So, the first stage is to figure out how much money you would be comfortable receiving every year and work from there. 

The next stage is to decide if you will continue working when you retire. Supplementing your income with a job you enjoy such as freelance work or other part-time activities will give you more disposable income.

Of course, even when you've decided how much income you want every year and whether or not you will take some extra work on the side, it's never going to be a precise art calculating the exact amount required for you to be able to retire early. Life expectancy is an unknown variable and life is never predictable. Your careful budgeting may quickly become irrelevant if illness strikes.

Crunching numbers

As it is not possible to estimate these variables, for this article I'm going to take the average life expectancy (81.6 years) and assume that the target is to retire on an income of £26,000 a year, the average that Which? gives for couples enjoying a comfortable retirement. I'm also going to assume that there is no other money coming in from side jobs.

Assuming you achieve an average annual return on your money of about 7% per annum (in line with the long-term market average) you don't need as much to start with as you might think.

Indeed, according to my figures, assuming a return of 7% per annum on your investments, you only need a starting pot of £350,000 to be able to retire at age 45 and receive £26,000 a year in income between age 45 and 82.

Start saving

The hard part is reaching this initial target, but it is possible if you have a strict financial plan in place and let the power of compounding work its magic.

For example, if you start saving age 20, and achieve a 7% return on your money, you need to save £5,300 a year or £442 a month to have built a pension pot worth £360,000 by age 45. If you start saving at age 30, hitting this target is harder, but not impossible. To build a pot worth £350,000 by age 45, you'd have to save £13,000 a year or £1,083 a month, once again assuming you're able to achieve a compound annual return of 7%.

If you want to retire with a pension pot of £1m at age 45, you'll need to save £15,000 a year starting age 20 and achieve a return of 7% on your money. Start age 30 and you will need to save £37,000 per year. The lesson here? Start now.

Time to start saving? 

These figures are only ballpark estimates, but they show just how easy it is to be able to retire early. All you need is a long-term financial and savings plan.

If you're looking for more tips on how to retire early or achieve financial independence, I recommend that you take a look at this brand new free report titled The Foolish Guide To Financial Independence.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.